Social enterprise is more than just a name

The public are more aware of social enterprise but aren’t quite sure what it means. Simon Steeden offers some clarity and discusses what more should be done to address the issue.

The public are more aware of social enterprise but aren’t quite sure what it means. Simon Steeden offers some clarity and discusses what more should be done to address the issue.

Recent news stories involving Salesforce and A4E have thrust social enterprise into the spotlight. They show that the public is becoming more aware of social enterprise and the mainstream corporate sector is taking note.

But many people still aren’t quite sure what social enterprise means.

Greater transparency is crucial if the social enterprise brand is not to be stunted through adoption by unscrupulous operators. We need to ensure there are effective signalling mechanisms to give the public the information they need to judge for themselves whether a business is genuinely a ‘social enterprise’.

The episode shows that public perception of social enterprise is growing. So much so that private companies increasingly want to benefit by holding themselves up as social enterprises.

At the same time there remains much public confusion about what it means to be a social enterprise, demonstrated by the recent decision of the Advertising Standards Authority that A4E - a private company which derives most of its income from government contracts aimed at boosting employment - should not advertise itself as a “social purpose business”. The ASA decided that by advertising itself in this way, A4E may cause the public to believe that it is a not-for-profit organisation.

The decision shows that there is continued confusion amongst the general public about what it means to be a social purpose business. Although there is growing recognition of the social enterprise “brand”, there is often a belief that none of the profits of a social enterprise should end up in private hands.

Certainly, this is one way to trade for social or community benefit, as shown by successful trading charities like Hackney Community Transport. But it is not the only way. Simply by including social purposes in a company’s objects, the directors will have a duty under company law to prioritise those social purposes over and above the maximisation of profits for the benefit of shareholders.

The problem is that, without an entrenched asset lock and active regulation, this type of approach relies heavily on the good faith of those involved. If social enterprise brand recognition continues to grow, there will be more of an incentive for unscrupulous operators to use that brand for their advantage.

So, transparency about legal structure is crucial to ensure public clarity about social enterprise and to protect the growing value of the brand.

But how can a business effectively signal that its social purposes are locked in? And how might those mechanisms be improved?

Improving the packaging

The easiest way to signal that a business is committed to more than returns to investors is to rely on established ‘off the shelf’ models, like community interest companies (CICs), co-operatives and community benefit societies (bencoms).

CICs and bencoms can use an irrevocable asset lock to demonstrate to the public that most of the profits of the business will always be reinvested for community purposes. Or by setting up a co-operative, the founders commit to democratic control and adherence to the cooperative principles.

But these off-the-shelf models need to be updated to make them more relevant to a new generation of social entrepreneurs.

In particular, the asset-lock CICs have to distinguish them from normal private companies' needs to be reformed to reward 'sweat equity' – the hard work of social entrepreneurs to get community-purpose businesses off the ground.

'Sweat equity' goes unrewarded in CICs because of the way their asset lock works. CICs have a cap on dividends of 20 per cent of share value and 35 per cent of total profits, meaning that shares are unlikely to increase much in value and so founders are unlikely to receive much of a return beyond the money they invested into the business if they sell their shares. A buyer would be unwilling to pay for the 'sweat equity' because their own returns on the founder’s shares would always be linked to the face value of those shares.

Many ideas have been floated about how to ensure that sweat equity is appropriately rewarded and incentivised – one way would be to remove the 20 per cent cap on dividends per share and rely on the overall annual cap related to total profits of the CIC.

There should also be a full review of the law around co-operatives and community benefit societies, which hasn’t been comprehensively updated for decades.

This means that co-ops and community benefit societies have not benefited from some of the advantages that companies have received from regular updating of company law.

For example, the duties of company directors are codified in the Companies Act 2006, but this is not the case with directors of co-ops or community benefit societies.

Community benefit societies are also unable to buy back non-withdrawable shares from their members in the same way that companies can, which means there can be difficulties in returning capital to investors. Reviewing this could make the recent removal of a £20,000 limit on holdings of non-withdrawable shares more useful for community energy projects and other large, long term community projects.

Made to order

There are other aspects of these off-the-shelf social enterprise models that need to be modernised in order for them to be able to fulfil their potential, particularly given the opportunities afforded by the government’s mutualisation agenda.

If they can provide a better fit more often, these structures will be more widely adopted and, with time, more widely recognised and understood by the general public.

But off-the-shelf models will not always be appropriate and other ways for businesses to credibly signal their social mission will need to be developed.

The Social Enterprise Mark is a great initiative in this area, providing objective criteria which allow many social enterprises structured in a more bespoke way to hold themselves out credibly as social enterprises.

However, not all social businesses will qualify for the Mark and so it may also be time for a new off-the-shelf social purpose business model: a company that trades for social purposes and adheres to ethical standards but is unrestricted in its use of profits and transparent about that. This would be similar to the B Corp model that is growing in popularity in the US.

Ultimately, though, legal structure is important but not for its own sake.

The main focus must be on how best to deliver and demonstrate real impact. The more progress that can be made in developing credible and widely recognised standards for reporting social impact, whatever your legal structure, the better.